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To encourage employee transfers, a computer manufacturer engaged
the services of a relocation company to buy relocated employees
residences. A transferred employee could then buy a replacement home
before the old residence was sold. In Amdahl Corp. v.
Commissioner , 108 TC no. 24 (1997), the corporation was
allowed to deduct any losses and expenses related to such sales as
ordinary and necessary business expenses. The IRS had argued that
such losses were capital losses and could be offset only against
capital gains (see revenue ruling 82-204, 1982-2 CB 192). The court
disagreed because the relocated employee retained legal title to the
residence and remained legally responsible for the mortgage and real
estate tax payments until a sale to a third party took place.

No Looking Back

In accordance with the Taxpayer Relief Act of 1997, the IRS issued
final regulations (TD 8775) effective July 2, 1998, that allow
manufacturers and construction contractors with long-term contracts
subject to the look-back methodand completed in tax years ending
after August 5, 1997to elect not to apply that method in de
minimis cases. To make the election, a manufacturer or
contractor simply attaches the statement to a return (including
extensions) that is filed on time and writes on the statement
Notification of Election Under Section 460(b)(6). In the final
regulations, the choice not to apply the look-back method
automatically revokes an election under regulations section
1.460-6(e) to use the delayed reapplication method.

Ad Designs Currently Deductible

RJR Nabisco, Inc., spent $1.8 million to develop graphic designs
for its cigarette products. The IRS said these costs had to be
capitalized because they resulted in goodwill or indefinite future
benefits. The IRS argued that there is a difference between the
costs of developing advertising campaigns and the cost of executing
those campaigns by producing a specific piece of advertising. The
court held that RJR Nabisco could currently deduct the costs of the
graphic designs as an advertising expense under regulations section
162 even though those costs might produce long-term benefits.
RJR Nabisco Inc., et al. v. Commissioner , TC Memo
1998-252.

Pay for Your Own Mistakes

The IRS has issued procedures to follow when a taxpayers refund is
erroneously deposited in another account. According to the IRS, if a
bank improperly deposits the money to the wrong account, through no
fault of the IRS, the government does not have to pay the bank. The
bank must recover the erroneous deposits from the account owner.
However, if the IRS caused the mistake, the refund must still be
issued to the proper taxpayer and the IRS must rectify its own
error.

Research Credit Test Tested

In Norwest Corporation v. Commissioner , 110 TC no. 34
(June 29, 1998), the court, in a case of first impression, closely
examined the seven tests that must be satisfied in order to obtain
the qualified research credit under regulations section 41 for
internal-use software. The court held that the three tests for
internal-use software set forth in the conference report
accompanying the Tax Reform Act of 1986 require a higher threshold
of technical advancement than that for other fields of research.

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